Chapter five: merchandising operations
Merchandising involves purchasing products which is inventory to resell to customers. Inventory for a
merchandising company can consist of many different items.
There is only one inventory classification which is called merchandising inventory or just inventory
Merchandising companies that purchase and sell directly to customers are called retailers.
Merchandising companies that sell to retailers are known as wholesalers.
Companies that produce goods for sale to wholesalers were others are called manufacturers.
Inventory has two common characteristics one is they are owned by the company and second is they are in a
form ready for sale to customers
Inventory is usually classified into three categories by manufacturing companies, raw materials, work in process,
and finished goods.
Raw materials are the basic goods and materials that are on hand and will be used in production but have not
yet been sent into production
Work in process is that portion of inventory on which production has started but it is not yet complete
Finished goods inventory is manufactured items that are completed and ready for sale
The steps in the accounting cycle for merchandising company are the same as the steps for a Service Company
Operating cycle--the time it takes to go from cash to cash in producing revenues—is usually longer for
merchandising company that it is for a Service Company.
For Service Company, the company perform services for cash or on account but in a merchandising company,
the company has to purchase merchandise for cash or on a account before it can sell it for cash or on account
See the illustration 5-1 in page229
Income measurement process
In a merchandising company, the main source of revenue is from the sale of merchandise, which is often
referred to simply as sales revenue or just sales
Expenses for a merchandising company are divided into two categories: 1. Operating expenses and 2. Cost of
Cost of goods sold is the total cost of the merchandise that was sold during the period. Thus expense is directly
related to the revenue that is recognized from the sale of goods.
Sales revenue - the cost of goods = gross profit
After gross profit is calculated, operating expenses are deducted to determine profit before income tax
Operating expenses are expenses that are incurred in the process of earning sales revenue. Of operating
expenses of a merchandising company include many of the same expense is found in the Service Company, such
as salaries, insurance, utilities, and depreciation.
For Service Company revenue is known as service revenue
See illustration 5-2 in page230
A merchandising company keeps track of its inventory to determine what is the available for sale which is the
inventory and what has been sold which is the cost of goods sold.
The flow of costs of a merchandising company is as follows: what you have on hand at the beginning of the
period + what you purchase during the period = total goods you have an available for sales during the period.
Beginning inventory + cost of goods purchased= cost of goods available for sale
As goods are sold, their assigned to cost of goods sold. Those goods that are not sold by the end of the
accounting period represented what’s left, or it in accounting terms called ending inventory
Ending inventory is reported as merchandise inventory, a current assets on the statement of financial position
The cost of goods sold (goods sold) is reported as cost of goods s